In a pair of opinions handed down on April 29, 2014, the United States Supreme Court returned to the roots of Section 285 of the Patent Act to decide under what circumstances a district court may award attorneys’ fees to a prevailing party in patent cases. In addition, the Court limited the U.S. Court of Appeals for the Federal Circuit to considering only whether district courts had abused that discretion in connection with parties’ motions for fee awards under Section 285.

In its 2005 decision in the case of Brooks Furniture Manufacturing, Inc. v. Dutailer International, Inc., 393 F.3d 1378 (Fed. Cir. 2005), the Federal Circuit Court of Appeals raised the bar for attorneys’ fees awards under Section 285, holding that an “exceptional case” that can justify an award of fees under the statute is one that involved “material inappropriate conduct related to the matter in litigation,” which that court described as “misconduct in the conduct of the litigation or in securing the patent.” 393 F.3d at 1381. Alternatively, the Federal Circuit allowed that a case may be sufficiently “exceptional” for purposes of considering an award of attorneys’ fees against a patent owner if “(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Id. (emphasis added). The Federal Circuit further held that because assertions of patent infringement must be presumed to have been made in good faith, any determination that a case is exceptional and a party is entitled to an award of fees “must be established by clear and convincing evidence.” Id. at 1382.

An about-face on the Federal Circuit’s 2005 decision

By its unanimous decisions on April 29, 2014, in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 572 U.S. ___ (2014), and Highmark Inc. v. Allcare Health Management System, Inc., 572 U.S. ___ (2014), the Supreme Court rejected the standards adopted by the Federal Circuit as entirely too rigid and an improper departure from the meaning and purpose of Section 282. The Court held that the statute is clear on its face and “imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases.” Octane Fitness, 572 U.S. at ___. And because the Patent Act does not define “exceptional,” that limitation must be construed according to the ordinary meaning of the words. Consequently, the Court held that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” Id. This determination is left to the discretion of district courts on a case-by-case basis, “considering the totality of the circumstances.” Id.

The Supreme Court went further, rejecting the Federal Circuit’s mandate that parties may establish their entitlement to fee awards under Section 285 only by clear and convincing evidence. This standard is far too high and is not supported by anything in the statute, according to the unanimous Court, who held that Section 285 imposes nothing greater than a simple discretionary inquiry by the district courts. Id. Accordingly, the Court found that these discretionary rulings by district courts are entitled to deference on appeal, and may be reversed only for an abuse of discretion. Awards of attorneys’ fees under Section 285, then, may not be reviewed de novo as the Federal Circuit had previously held. Highmark, 572 U.S. at ___.

“Exceptional cases” and awards of attorneys’ fees: still unsettled

It remains to be seen how these rulings will practically affect the district courts’ determinations of “exceptional cases” and awards of attorneys’ fees under Section 285. However, many commentators view the Supreme Court’s decisions on April 29 as providing another weapon to infringement claims levied by so-called “nonpracticing entities” and “patent assertion entities.” These patent owners, who do not themselves practice their patents, seek to license others, often under the threat of costly patent litigation. Under the framework announced this week by the Supreme Court in Octane Fitness and Highmark, these entities may soon find themselves in a “loser pays” litigation environment if they choose to pursue lawsuits as a licensing strategy where the facts and the law do not support their infringement positions.

There are also legislative proposals that the standard under Section 285 be lowered even further whereby district courts have discretion to award attorneys outside of “exceptional cases.” The primary consideration is to attempt to curb “frivolous nonpracticing litigation.” Stay tuned as the law in this area is far from settled.

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